Tuesday, June 12, 2012

Advantages of Housing Loans Using SIBOR Rate

Advantages of Housing Loans Using SIBOR Rate

Home loans are some of the most common types of loans people apply for in order to purchase another property or to refinance a home renovation or rehabilitation project. There are many factors to consider before choosing a housing loan such as the amount of loan, which bank or institution to apply and the interest rates available. Choosing the interest rate for your home loan is very important since this factor will determine how much you are going to pay every month to pay off your loan. That is why many home buyers and investors prefer the lowest interest rate as possible in order to obtain lower monthly payment costs. One of the most common interest rates used as benchmark by various banks in Asia is the SIBOR rate or the Singapore Interbank Offered Rate.

Aside from Singapore, many countries in Asia also use SIBOR for their home loans. The Association of Banks in Singapore or the ABS is the main institution that sets the SIBOR rate every day. Since it is one of the most common benchmarks in the industry, it is important that people especially home buyers and borrowers have sufficient knowledge about this type of interest rate. Banks and lending companies use SIBOR rate because of its good qualities. One advantage of SIBOR against other types of variable interest rates is that it is more stable compared to the SOR which is another type of benchmark used by banks and lending institutions in Asia. SOR are only ideal for short term interest rates while SIBOR rate is more ideal for long term home loans. This is because SOR pegged home loans have lower initial interest rates but are very volatile and always fluctuating while SIBOR starts a little higher but do not fluctuate rapidly.

If you don't want to take risks with home loans pegged on variable interest rates, you can consider home loans based on fixed rates. Fixed interest rates are higher than variable rates since banks and lending companies are profit-driven institutions and they operate by securing their profits and reducing possible losses. With higher fixed rates, banks can minimize risk of losing money no matter what the economic condition and performance will be. Aside from being relatively high, fixed rates are also used by banks as promotional rates which are only applied at the initial years of the housing loan. After the initial years, the interest rate will be changed to the main benchmarks such as the SIBOR rate. Using fixed rates are only ideal if you want to have better comparison among home loan options and deals available to you.

Aside from the common benchmarks and fixed rates, some banks and lending institutions offer housing loans pegged on their own derived interest rate. Banks using these kinds of interest rates usually make changes on the rates if the factors affecting the rates also changes such as the supply and demand, real estate performance and other economic factors affecting their self-determined interest rate. Compared to SIBOR rate which is publicly available and can be easily monitored every day, changes to the interest rates determined by banks are only announced by giving notice to its clients.